Thanks for all the replys but I still can't get it working! It is all the more annoying that this has never been a problem before.
Here is my object setup code:
load image "imagesshadow.png",704
for k = 1 to 16
make object plain 800+k,9,9
texture object 800+k,704
set object transparency 800+k,1
ghost object on 800+k,4
xrotate object 800+k,270
next k
Which I believe is what I am being told here but this is the result:
I get the same result with DDS files also - Thanks Indi, great link!
The Photoshop problem is no longer an issue because using 'Save for web' I can save PNG-24 with transparency and I can now save DDS - also with transparency. What I can't do is get that transparency to work with DBP.
What am I doing wrong??!!?!
[Edit] My shadow should look like this:
I had to convert the PNG to JPG for upload but you get the idea.